AGILYSYS, INC.
In "Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A"), management explains the general financial condition and
results of operations for Agilysys and subsidiaries including:
- what factors affect our business;
- what our earnings and costs were;
- why those earnings and costs were different from the year before;
- where the earnings came from;
- how our financial condition was affected; and
- where the cash will come from to fund future operations.
The MD&A analyzes changes in specific line items in the Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows and
provides information that management believes is important to assessing and
understanding our consolidated financial condition and results of operations.
This Quarterly Report on Form 10-Q updates information included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2019 , filed with the
Securities and Exchange Commission (SEC). This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes that appear in Item 1 of this Quarterly Report as well as our Annual
Report for the year ended March 31, 2019 . Information provided in the MD&A may
include forward-looking statements that involve risks and uncertainties. Many
factors could cause actual results to be materially different from those
contained in the forward-looking statements. See "Forward-Looking Information"
on page 29 of this Quarterly Report, Item 1A "Risk Factors" in Part II of this
Quarterly Report, and Item 1A "Risk Factors" in Part I of our Annual Report for
the fiscal year ended March 31, 2019 for additional information concerning these
items. Management believes that this information, discussion, and disclosure is
important in making decisions about investing in Agilysys .
Overview
Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative guest-centric technology solutions for casinos, hotels, resorts, cruise ships, managed foodservice providers, stadiums and arenas.Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payment solutions, and related hospitality applications, to manage the entire guest journey.Agilysys is known for its leadership in hospitality, its broad product offerings and its customer-centric service. Some of the largest hospitality companies around the world useAgilysys solutions to help improve guest loyalty, drive revenue growth and increase operational efficiencies.
Our top priority is to increase shareholder value by improving operating and financial performance and profitably growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to fund enhancements to existing software products, to develop and market new software products, and to expand our customer breadth, both vertically and geographically.
Our strategic plan specifically focuses on:
• Putting the customer first • Accelerating our product development • Improving organizational efficiency and teamwork • Developing our employees and leaders
• Growing revenue by improving the breadth and depth of our product set across
both our well established products and our newer rGuest platform
• Growing revenue through international expansion
The primary objective of our ongoing strategic planning process is to create
shareholder value by capitalizing on growth opportunities, turning profitable
and strengthening our competitive position within the specific technology
solutions and end markets we serve. Profitability and industry leading growth
will be achieved through tighter management of operating expenses and sharpening
the focus of our investments to concentrate on growth opportunities that offer
the highest returns.
Revenue - Defined
We separately present revenue earned as products revenue, support, maintenance
and subscription services revenue or professional services revenue in our
condensed consolidated statements of operations. In addition to the SEC
requirements, we may, at times, also refer to revenue as defined below. The
terminology, definitions, and applications of terms we use to describe our
revenue may be different from those used by other companies and caution should
be used when comparing these financial measures to those of other companies. We
use the following terms to describe revenue:
• Revenue - We present revenue net of sales returns and allowances
• Products revenue - Revenue earned from the sales of software licenses, third
party hardware and operating systems.
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• Support, maintenance and subscription services revenue - Revenue earned from
the sale of proprietary and remarketed ongoing support, maintenance and
subscription services.
• Professional services revenue - Revenue earned from the delivery of
implementation, integration and installation services for proprietary and
remarketed products.
Results of Operations
Third Fiscal Quarter 2020 Compared to Third Fiscal Quarter 2019
Net Revenue and Operating Loss
The following table presents our consolidated revenue and operating results for
the three months ended
Three months ended
December 31, Increase (decrease)
2019 2018 $ %
Net revenue:
Products $ 12,126 $ 10,232 $ 1,894 18.5 %
Support, maintenance and subscription
services 20,965 19,345 1,620 8.4
Professional services 8,896 6,437 2,459 38.2
Total net revenue 41,987 36,014 5,973 16.6
Cost of goods sold:
Products (inclusive of developed
technology amortization) 9,639 8,371 1,268 15.1
Support, maintenance and subscription
services 4,841 3,909 932 23.8
Professional services 6,443 5,087 1,356 26.7
Total cost of goods sold 20,923 17,367 3,556 20.5
Gross profit $ 21,064 $ 18,647 $ 2,417 13.0 %
Gross profit margin 50.2 % 51.8 %
Operating expenses:
Product development $ 11,285 $ 10,059 $ 1,226 12.2 %
Sales and marketing 4,918 5,217 (299 ) (5.7 )
General and administrative 6,084 5,865 219 3.7
Depreciation of fixed assets 854 651 203 31.2
Amortization of intangibles 608 675 (67 ) (9.9 )
Restructuring, severance and other
charges 11 58 (47 ) nm
Operating loss $ (2,696 ) $ (3,878 ) $ 1,182 (30.5 )%
Operating loss percentage (6.4 )% (10.8 )%
nm - not meaningful
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The following table presents the percentage relationship of our condensed
consolidated statement of operations line items to our consolidated net revenues
for the periods presented:
Three months ended
December 31,
2019 2018
Net revenue:
Products 28.9 % 28.4 %
Support, maintenance and subscription services 49.9 53.7
Professional services 21.2 17.9
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 23.0 % 23.2 %Support, maintenance and subscription services 11.5 10.9
Professional services 15.3 14.1
Total cost of goods sold 49.8 %
48.2 %
Gross profit 50.2 % 51.8 %
Operating expenses:
Product development 26.9 % 27.9 %
Sales and marketing 11.7 14.5
General and administrative 14.5 16.3
Depreciation of fixed assets 2.0 1.8
Amortization of intangibles 1.5 1.9
Restructuring, severance and other charges 0.0
0.2
Operating loss (6.4 )% (10.8 )%
Net revenue. Total net revenue increased $6.0 million , or 16.6%, during the
third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
Products revenue increased $1.9 million , or 18.5%, due to increased sales of
third-party hardware including new customers and expansion with existing
customers. Support, maintenance and subscription services revenue increased $1.6
million , or 8.4%, compared to the third quarter of fiscal 2019 driven by
continued growth in subscription-based service revenue, which increased 24.8%
during the third quarter of fiscal 2020 compared to the third quarter of fiscal
2019. Professional services revenue increased $2.5 million , or 38.2%, due to
ongoing installations and integration of our software solutions for our growing
customer base.
Gross profit and gross profit margin. Our total gross profit increased $2.4
million , or 13.0%, for the third quarter of fiscal 2020 and total gross profit
margin decreased from 51.8% to 50.2%. Products gross profit increased $0.6
million and gross profit margin increased approximately 232 basis points to
20.5%. The improvement is primarily related to increased product revenue on a
partially fixed cost base which includes software development cost amortization.
Support, maintenance and subscription services gross profit increased $0.7
million and gross profit margin decreased 288 basis points to 76.9%. The margin
decrease is the result of costs incurred for the expansion of our teams and
infrastructure to continue to support and host customers. Professional services
gross profit increased $1.1 million and gross profit margin increased 660 basis
points to 27.6% due to the increased efficiencies of implementation projects
during the current quarter following the hiring and training of additional team
members at the beginning of fiscal 2020 to meet growing demand for professional
services.
Operating expenses
Operating expenses, excluding legal settlements, restructuring, severance and
other charges, increased
Product development. Product development increased$1.2 million , or 12.2%, in the third quarter of fiscal 2020 due primarily to an increase in headcount and additional rent expense related to ourIndia Development Center . 22
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Sales and marketing. Sales and marketing decreased$0.3 million , or 5.7%, in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019 due to the overall consistency of sales and marketing team composition, compensation and activities. General and administrative. General and administrative increased by$0.2 million , or 3.7%, in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019 due primarily to increases in headcount and improvement of our internal systems to support our growing organization and business requirements. Other (Income) Expenses Three months ended December 31, (Unfavorable) favorable (Dollars in thousands) 2019 2018 $ % Other (income) expense: Interest (income)$ (92 ) $ (83 ) $ 9 10.8 % Interest expense 25 3 (22 ) nm Other (income) expense, net (142 ) 68 210 nm Total other (income), net$ (209 ) $ (12 ) $ 197 nm nm - not meaningful
Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in treasury bills and commercial paper.
Interest expense. Interest expense consists of costs associated with finance leases.
Other (income) expense. Other (income) expense consists mainly of the impact of
foreign currency due to movement of European and Asian currencies against the US
dollar.
Income Taxes
Three months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2019 2018 $ %
Income tax expense $ 95 $ 182 $ 87 nm
Effective tax rate (3.8 )% (4.7 )%
nm - not meaningful
For the three months ended December 31, 2019 and 2018, the effective tax rate
was different than the statutory rate due primarily to the recognition of net
operating losses as deferred tax assets, which were offset by increases in the
valuation allowance, certain foreign and state tax effects, and other U.S.
permanent book to tax differences.
Although the timing and outcome of tax settlements are uncertain, it is
reasonably possible that during the next 12 months an immaterial reduction in
unrecognized tax benefits may occur based on the outcome of tax examinations and
as a result of the expiration of various statutes of limitations. We are
consistently subject to tax audits; due to the nature of examinations in
multiple jurisdictions, changes could occur in the amount of gross unrecognized
tax benefits during the next 12 months which cannot be estimated at this time.
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Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in theU.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.
Results of Operations
First Nine Months Fiscal 2020 Compared to First Nine Months Fiscal 2019
Net Revenue and Operating Loss
The following table presents our consolidated revenue and operating results for
the nine months ended
Nine months ended
December 31, Increase (decrease)
2019 2018 $ %
Net revenue:
Products $ 34,868 $ 28,081 $ 6,787 24.2 %
Support, maintenance and subscription
services 61,377 56,130 5,247 9.3
Professional services 24,854 20,013 4,841 24.2
Total net revenue 121,099 104,224 16,875 16.2
Cost of goods sold:
Products 28,056 23,204 4,852 20.9
Support, maintenance and subscription
services 13,676 11,960 1,716 14.3
Professional services 18,071 14,775 3,296 22.3
Total cost of goods sold 59,803 49,939 9,864 19.8
Gross profit $ 61,296 $ 54,285 $ 7,011 12.9 %
Gross profit margin 50.6 % 52.1 %
Operating expenses:
Product development $ 32,127 $ 27,299 $ 4,828 17.7 %
Sales and marketing 14,307 14,363 (56 ) (0.4 )
General and administrative 17,998 17,047 951 5.6
Depreciation of fixed assets 1,774 1,933 (159 ) (8.2 )
Amortization of intangibles 1,900 1,892 8 0.4
Restructuring, severance and other
charges 438 948 (510 ) (53.8 )
Legal settlements, net (125 ) 126 (251 ) nm
Operating Loss $ (7,123 ) $ (9,323 ) $ 2,200 (23.6 )%
Operating loss percentage (5.9 )% (8.9 )%
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The following table presents the percentage relationship of our condensed
consolidated statement of operations line items to our consolidated net revenues
for the periods presented:
Nine months ended
December 31,
Net revenue: 2019 2018
Products 28.8 % 26.9 %
Support, maintenance and subscription services 50.7 53.9
Professional services 20.5 19.2
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 23.2 % 22.3 %Support, maintenance and subscription services 11.3 11.4
Professional services 14.9 14.2
Total cost of goods sold 49.4 %
47.9 %
Gross profit 50.6 % 52.1 %
Operating expenses:
Product development 26.5 % 26.2 %
Sales and marketing 11.8 13.8
General and administrative 14.9 16.3
Depreciation of fixed assets 1.4 1.9
Amortization of intangibles 1.6 1.8
Restructuring, severance and other charges 0.4 0.9
Legal settlements, net (0.1 )
0.1
Operating loss (5.9 )% (8.9 )%
Net revenue. Total net revenue increased $16.9 million , or 16.2%, during the
first nine months of fiscal 2020 compared to the first nine months of fiscal
2019. Products revenue increased $6.8 million , or 24.2%, due to increased sales
of third-party hardware including new customers and expansion with existing
customers. Support, maintenance and subscription services revenue increased $5.3
million , or 9.3%, compared to the first nine months of fiscal 2019 driven by
support and maintenance for the growth in customers using our on premise
software products along with continued increases in subscription-based service
revenue, which increased 22.2% during the first nine months of fiscal 2020
compared to the first nine months of fiscal 2019. Professional services revenue
increased $4.8 million , or 24.2%, due to ongoing installation and integration of
our software solutions for our growing customer base.
Gross profit and gross profit margin. Our total gross profit increased $7.0
million , or 12.9%, for the first nine months of fiscal 2020 and total gross
profit margin decreased slightly from 52.1% to 50.6%. Products gross profit
increased $2.0 million and gross profit margin increased approximately 217 basis
points to 19.5%. The improvement is primarily related to increased product
revenue on a partially fixed cost base which includes software development cost
amortization. Support, maintenance and subscription services gross profit
increased $3.5 million and gross profit margin decreased 97 basis points to
77.7%. Our slight margin decrease is due to the expansion of our teams and
infrastructure to continue supporting and hosting customers. Professional
services gross profit increased $1.5 million and gross profit margin increased
112 basis points to 27.3% due to the increased efficiencies of implementation
projects during the first nine months of fiscal 2020 following the hiring and
training of additional team members at the beginning of fiscal 2020 to meet
growing demand for professional services.
Operating expenses
Operating expenses, excluding legal settlements, restructuring, severance and other charges, increased$5.6 million , or 8.9%, during the first nine months of fiscal 2020 compared with the first nine months of fiscal 2019. Product development. Product development increased$4.8 million , or 17.7%, in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019.$2.5 million of this increase was due to increased employee compensation and hiring costs from our continued expansion of our product development teams. The remaining$2.3 million was due to the reduction of cost capitalization. The products in our rGuest platform for which we capitalized costs reached general availability be the beginning of the second quarter of fiscal 2019. These products join our well established products with the application of agile development practices in a more dynamic development process that involves higher frequency releases of product features and functions. The Company capitalized$2.0 million of external use software costs, and$0.3 million of internal use software development costs in first quarter of fiscal 2019. The Company capitalized no software development costs in the first nine months of fiscal 2020. 25
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Sales and marketing. Sales and marketing decreased slightly by$0.1 million , or 0.4%, in the first nine months of fiscal 2020 compared with the first nine months of fiscal 2019 due to the overall consistency of sales and marketing team composition, compensation and activities.
General and administrative. General and administrative increased by
Restructuring, severance, and other charges. Restructuring, severance, and other charges decreased$0.5 million during the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 due to a reduction in severance payments and executive search fees.
Legal settlements, net. The Company received approximately
Other (Income) Expenses
Nine months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2019 2018 $ %
Other (income) expense:
Interest (income) $ (287 ) $ (235 ) $ 52 22.1 %
Interest expense 28 8 (20 ) nm
Other expense, net 50 293 243 nm
Total other (income) expense, net
nm
nm - not meaningful
Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in treasury bills and commercial paper.
Interest expense. Interest expense consists of costs associated with finance leases.
Other expense. Other expense consists mainly of the impact of foreign currency due to movement of European and Asian currencies against the US dollar.
Income Taxes
Nine months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2019 2018 $ %
Income tax expense $ 161 $ 186 $ 25 nm
Effective tax rate (2.3 )% (2.0 )%
nm - not meaningful
For the nine months ended
Although the timing and outcome of tax settlements are uncertain, it is
reasonably possible that during the next 12 months an immaterial reduction in
unrecognized tax benefits may occur based on the outcome of tax examinations and
as a result of the expiration of various statutes of limitations. We are
consistently subject to tax audits; due to the nature of examinations in
multiple jurisdictions, changes could occur in the amount of gross unrecognized
tax benefits during the next 12 months which cannot be estimated at this time.
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Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in theU.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.
Liquidity and Capital Resources
Overview
Our cash requirements consist primarily of working capital needs, operating expenses, capital expenditures, and employee tax withholdings payments for share-based compensation. We believe that cash flow from operating activities, cash on hand of$41.9 million as ofDecember 31, 2019 and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements.
As of
AtDecember 31, 2019 , 100% of our cash and cash equivalents of which 93% is located inthe United States , were deposited in bank accounts or invested in highly liquid investments with original maturity from the date of acquisition of three months or less, including investments in treasury bills and commercial paper. We believe credit risk is limited with respect to our cash and cash equivalents balances. Cash Flow Nine Months Ended December 31, (In thousands) 2019 2018
Net cash provided by (used in):
Operating activities $ 5,273 $ 1,719
Investing activities (3,035 ) (3,826 )
Financing activities (1,071 ) (702 )
Effect of exchange rate changes on cash (33 ) (139 )
Net increase (decrease) in cash and cash equivalents
Cash flow used in operating activities. Cash flow provided by operating activities was$5.3 million in the first nine months of fiscal 2020. The provision of cash was due primarily to the offset of$16.3 million in non-cash expense including depreciation, amortization, and share-based compensation, against our operating loss of$7.1 million and the decrease of$3.6 million in net operating assets and liabilities. Cash flow used in investing activities. During the first nine months of fiscal 2020, the$3.0 million used in investing activities consisted of property and equipment purchases. During the first nine months of fiscal 2019, the$3.8 million used in investing activities consisted of$1.6 million of property and equipment purchases along with$2.2 million of capitalized software development costs. Cash flow used in financing activities. During the first nine months of fiscal 2020, the$1.1 million used in financing activities was primarily related to the repurchase of shares to satisfy employee tax withholding on share-based compensation.
Contractual Obligations
As of
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have had or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
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Critical Accounting Policies
A detailed description of our significant accounting policies is included in our Annual Report for the year endedMarch 31, 2019 . There have been no material changes in our significant accounting policies and estimates sinceMarch 31, 2019 except as noted in Note 2, Summary of Significant Accounting Policies.
Forward-Looking Information
This Quarterly Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A in Part II of this Quarterly Report and Item IA of our Annual Report for the fiscal year endedMarch 31, 2019 . We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events, or otherwise.
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